Managerial Economics, Allen, Ch 10 Test Bank

Chapter 10: Bundling and Intrafirm Pricing MULTIPLE CHOICE

1. When When a fir firm m req requi uire ress a cust custom omer er to buy buy add addit itio iona nall pro produ duct ctss in in ord order er to buy buy one of its products, this is known as a(n): a. bundling contract.  b. price differentiation. differentiation. c. oligopolistic device. d. two-part tariff. e. maximizing device. ANS: A Bundling MSC: MSC: Fact Factua uall

DIF:

Easy

REF: 357

TOP: The Mechanics of

2. The The res reser erva vati tion on pric prices es,, in in dol dolla lars rs,, for for thr three ee clas classe sess of of dem deman ande ders rs ( A,  B, and C ) for two restaurants (1 and 2) are given in the following table. What is the maximum revenue that can be generated by setting a separate price for each restaurant?

a.  b. c. d. e. ANS: A Bundling MSC: MSC: Appl Applie ied d

$49. $45. $36. $84. $60. DIF:

Easy

REF: 358

TOP: The Mechanics of

3. The The res reser erva vati tion on pric prices es,, in in dol dolla lars rs,, for for thr three ee clas classe sess of of dem deman ande ders rs ( A,  B, and C ) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum revenue that can be generated by setting a separate price for each of the three restaurants?

a.  b. c. d. e. ANS: A Bundling MSC: MSC: Appl Applie ied d

$59. $75. $81. $89. None of the above. DIF:

Easy

REF: 358

TOP: The Mechanics of

4. The The res reser erva vati tion on pric prices es,, in in dol dolla lars rs,, for for thr three ee clas classe sess of of dem deman ande ders rs ( A,  B, and C ) for two restaurants (1 and 2) are given in the following table. What is the maximum revenue that can be generated by setting a bundled price for the two r estaurants?

a.  b. c.

$49. $45. $36.

d. e. ANS: B Bundling MSC: Applied

$34. $30. DIF:

Easy

REF: 358

TOP: The Mechanics of

5. The reservation prices, in dollars, for three classes of demanders ( A,  B, and C ) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum revenue that can be generated by setting a bundled price for the three restaurants?

a.  b. c. d. e. ANS: B Bundling MSC: Applied

$59. $75. $81. $89. None of the above. DIF:

Easy

REF: 358

TOP: The Mechanics of

6. The reservation prices, in dollars, for three classes of demanders ( A,  B, and C ) for two restaurants (1 and 2) are given in the following table. What is the maximum revenue that can be generated by setting a separate price for each restaurant?

a.  b. c. d. e. ANS: C Bundling MSC: Applied

$49. $45. $36. $34. $30. DIF:

Easy

REF: 358

TOP: The Mechanics of

7. The reservation prices, in dollars, for three classes of demanders ( A,  B, and C ) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum revenue that can be generated by setting a separate price for each of the three restaurants?

a.  b. c. d. e. ANS: C Bundling MSC: Applied

$46. $52. $63. $72. $84. DIF:

Easy

REF: 358

TOP: The Mechanics of

8. The reservation prices, in dollars, for three classes of demanders ( A,  B, and C ) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum revenue that can be generated by setting a bundled price for the three restaurants?

a.  b. c. d. e. ANS: D Bundling MSC: Applied

$46. $52. $63. $72. $84. DIF:

Easy

REF: 358

TOP: The Mechanics of

9. The reservation prices, in dollars, for three classes of demanders ( A,  B, and C ) for two restaurants (1 and 2) are given in the following table. What is the maximum revenue that can be generated by setting a bundled price for the two r estaurants?

a.  b. c. d. e. ANS: E Bundling MSC: Applied

$49. $45. $36. $84. $60. DIF:

Easy

REF: 358

TOP: The Mechanics of

10. When consumers can purchase a set of goods as a bundle or separately, then the seller is engaging in: a. simple bundling.  b. complex bundling. c. performance bundling. d. mixed bundling. e. engaged bundling. ANS: D Bundling MSC: Factual

DIF:

Moderate

REF: 358

TOP: The Mechanics of

11. There are 12,000 fans attending a basketball tournament featuring three regional powerhouses in Charlotte, North Carolina. There are 4,000 of each of three types of fans, identified by the school for which they cheer. The fans value a ticket to see a game according to which teams are competing as shown in the following table. The stadium holds 12,000, and the marginal cost of seating another viewer is zero. What is the change in the maximum profits that organizers can earn for the tourney if they sell the three games as a  package instead of as individual games?

a.  b. c. d. e. ANS: B

$20,000. $120,000. $160,000. $200,000. $220,000. DIF:

Moderate

REF: 358

TOP: The Mechanics of

Bundling MSC: Applied 12. If Chip and Cathy have different valuations on dancing and dinner as in the following table, what is the maximum profit Sammy can extract from Chip and Cathy for an evening’s entertainment at Sammy’s dinner theater if Sammy’s marginal cost is $25 for dinner and $5 for dancing per person? Chip $40 $35

Dinner Dancing

a.  b. c. d. e.

Cathy $30 $50

$60. $70. $80. $90. $100.

ANS: D Bundling MSC: Applied 13. a.  b. c. d. e.

DIF:

Moderate

REF: 358

TOP: The Mechanics of

Tying can sometimes be justified as helping consumers by: brand-name quality protection. different consumer evaluations of the main good. transportation costs. standard industry practice. offsetting price reductions in the main good.

ANS: A DIF: Easy REF: 386 TOP: Tying at IBM, Xerox, and Microsoft

MSC: Factual

14. Play It Again Sam is a producer of high-end CD burners. It requires customers to purchase high-quality blank CDs from it in order to maintain warranty agreements. This is an example of a: a. bundle.  b. two-part tariff. c. tying contract. d. transfer price. e. joint product. ANS: C DIF: Easy REF: 386 TOP: Tying at IBM, Xerox, and Microsoft

MSC: Applied

15. When the NCAA basketball tournament will only sell tickets to all three games held at a given site as a package, it is practicing: a. first-degree price discrimination.  b. second-degree price discrimination. c. third-degree price discrimination. d. markup pricing. e. tying. ANS: E

DIF:

Easy

REF: 386

TOP: Tying at IBM, Xerox, and Microsoft 16.  price when: a.

The transfer price of an upstream product should always equal the market there is an outside market for the upstream  product. the price elasticity of demand for the upstream product is greater than 1 (in absolute value). there is a perfectly competitive market for the downstream product. the marginal cost of the downstream  product is greater than 1. the firm is a monopolist in its downstream market.

 b.

c. d. e. ANS: A MSC: Factual

MSC: Applied

DIF:

Easy

REF: 388

TOP: Transfer Pricing

17. The Two Stage Photo Company has a division for each stage of photo  processing. There is no external market for the first stage’s output. For a fixed quantity of  photo processing, the transfer price should depend on: a. whatever management wants.  b. marginal costs at stage 1 only. c. marginal costs at each stage. d. average costs at stage 1 only. e. average costs at each stage. ANS: B MSC: Factual

DIF:

Easy

REF: 388

TOP: Transfer Pricing

18. If a firm uses optimal transfer pricing between production division A and marketing division B, and a competitive external market for the output of division A exists, then production division A will surely: a. make positive economic profits.  b. make normal economic profits. c. sell at marginal costs. d. sell at the external price. e. sell at less than the external price. ANS: C MSC: Factual 19. a.  b. c. d. e.

ANS: C

DIF:

Easy

REF: 388

TOP: Transfer Pricing

Transfer prices are needed when: firms purchase raw materials from other firms. consumers sell goods and services to one another. markets must be simulated within firms. products are bundled and sold as a package. firms charge different prices to customers where there are no differences in production costs. DIF:

Easy

REF: 388

TOP: Transfer Pricing

MSC: Factual 20. The XYZ Steel Company produces its own coal for use in its production facility. The demand for steel is given by  P  s = 500 – 2 Q s and the total cost of producing steel is given by TC  s = 175Q s, where Q s is tons of steel per week. The price of coal in a perfectly competitive market outside the firm is $250 per ton, and the total cost of producing coal is given by TC   = 40 + 5Q 2, where Q  is tons of coal per week. How much should XYZ steel c

c

c

charge itself for coal? a.  b. c. d. e. ANS: A MSC: Applied

$250 per ton. $350 per ton. $500 per ton. $750 per ton. $1,000 per ton. DIF:

Easy

REF: 388

TOP: Transfer Pricing

21. The XYZ Steel Company produces its own coal for use in its production facility. The demand for steel is given by  P  s = 500 – 2 Q s and the total cost of producing steel is given by TC  s = 175Q s, where Q s is tons of steel per week. The price of coal in a perfectly competitive market outside the firm is $250 per ton, and the total cost of producing coal is given by TC   = 40 + 5 Q 2, where Q  is tons of coal per week. How much coal should the c

c

c

XYZ Company produce? a.  b. c. d. e. ANS: B MSC: Applied

DIF:

2 tons. 25 tons. 100 tons. 200 tons. 250 tons. Easy

REF: 388

TOP: Transfer Pricing

22. A firm has a division that produces  X , whose total costs are TC   = 10 + Q2 (where Q is the quantity of  X ). The marketing division adds its own total costs of 5 + 3 Q. In the competitive external market for  X,  the wholesale price is $10. The transfer price of  X  should be: a. $2.  b. $5. c. $10. d. $12. e. $15. ANS: C MSC: Applied

DIF:

Easy

REF: 388

TOP: Transfer Pricing

23. A firm has a division that produces chemical Y , whose average total costs are  ATC   = 50 + 2 Q (where Q is the quantity of Y ), and a marketing division that adds its own average total costs of  ATC   = 20 + 3 Q. There is no external market price of Y . The transfer  price of Y  should be: a. $50.  b. $4Q. c. $50 + 4Q.

d. e.

$2Q. $5Q.

ANS: C MSC: Applied

DIF:

Easy

REF: 388

TOP: Transfer Pricing

24. The XYZ Steel Company produces its own coal for use in its production facility. The demand for steel is given by  P  s = 500 – 2 Q s and the total cost of producing steel is given by TC  s = 175Q s, where Q s is tons of steel per week. The price of coal in a perfectly competitive market outside the firm is $250 per ton, and the total cost of producing coal is given by TC   = 40 + 5 Q 2, where Q  is tons of coal per week. How much coal will XYZ sell c

c

c

outside the firm? a.  b. c. d. e. ANS: A MSC: Applied

6.25 tons. 18.75 tons. 25 tons. 43.75 tons. 75 tons. DIF:

Moderate

REF: 388

TOP: Transfer Pricing

25. The XYZ Steel Company produces its own coal for use in its production facility. The demand for steel is given by  P  s = 500 – 2 Q s and the total cost of producing steel is given by TC  s = 175Q s, where Q s is tons of steel per week. The price of coal in a perfectly competitive market outside the firm is $250 per ton, and the total cost of producing coal is given by TC   = 40 + 5Q 2, where Q  is tons of coal per week. How much steel should the c

c

c

XYZ Company produce? a.  b. c. d. e. ANS: B MSC: Applied

DIF:

6.25 tons. 18.75 tons. 25 tons. 43.75 tons. 75 tons. Moderate

REF: 388

TOP: Transfer Pricing

26. If a firm has a marketing division and a production division with increasing costs, and a competitive external market for the production division’s output exists, then the marketing division should always buy: a. from the production division at production’s  price.  b. all it wants at the external market price from the production division. c. only externally. d. all the production division can produce at the external price. e. what it wants at the external market price, first from whatever the production division wishes to sell and then, if necessary, externally. ANS: E MSC: Conceptual

DIF:

Moderate

REF: 388

TOP: Transfer Pricing